If you’re an entrepreneur who’s built a startup that consistently scales it’s userbase, you deserve a hearty congratulations. It’s hard enough to build a startup, and that much more challenging to build one that seems to be growing at a steady clip. You’re part of a small group of founders who have actually executed on building a working growth engine. You’ve probably growth hacked your way to a viral factor great than one, or maybe your lifetime value per customer is greater than your cost of customer acquisition. Is it time to break out the champagne and start brainstorming ticker symbol ideas? Not so fast. Many seemingly working growth engines are unsustainable, so remain paranoid. Here are a few reasons growth engines can sputter: 1. Virality erodes: Some products are ridiculously viral for some period of time. They manage to generate invites to a huge number of users on the platform on which they are built (e.g. Facebook). Then response to invites decreases as they run out of new users who will fall for their viral tricks. For example, at the end of 2007 there was a Facebook app class at Stanford in which multiple students built apps that reached millions within a couple months. Then virality decreased and with low retention, usage quickly plunged. See Andrew Chen’s great article for more on this topic. 2. The platform owner makes changes: Building on existing platforms can get you access to many users but also leaves you vulnerable to changes the platform owner might make. Facebook has historically changed policies in ways that have deeply impacted growth for many developers. Likewise, If Apple changes their app ranking algorithm or Google changes their search algorithm your growth can go down the tubes. 3. The platform grows competitive: Even if you have a great product on a stable platform, you aren’t necessarily safe. If you are early to a fast growing platform, you may enjoy tremendous growth until everyone else finds out that it is the place to be. Many developers who were early to iOS reaped the benefits of the first mover advantage until the platform became competitive. 4. Your platform shrinks:
Let’s say you built on top of a platform like MySpace. It would have been pretty hard to grow the last few years. ‘Nuff said about that one.
5. You saturate advertising markets
To illustrate, let’s say that up to a certain monthly spend, your lifetime value (LTV) per user is 3X your customer acquisition cost (CAC). Then you increase you spend and realize you can only drive a 2X return. As you increase spend, you realize that your CAC is quickly approaching your LTV and you can no longer invest more in advertising without threatening the solvency of your business. This dynamic may be driven by a number of factors: a limited number of highly profitable target customers, competing firms within your industry introducing better products, or even competition from other types of advertisers vying for your users. Either way, your growth will come to a screeching halt if your LTV/CAC ratio degrades because you won’t be spitting off cash to promote your product and increase your userbase.
6. Scaling difficulties lead to poor performance
If your site performance takes a turn for the worse, sustainable growth will prove fleeting. Friendster is a good example. At least the knowledge to keep fast-growing social sites stable is much more widely accessible now than in the days Friendster was a rocketship. Still, this is an area to watch like a hawk.
7. Not enough people like your product:
This one relates to some of the others, and speaks to the holy grail within entrepreneurship. To grow for the long haul, you need to achieve product-market fit for a massive market. If not enough people like your product, it could mean your product isn’t good enough to appeal to people beyond some segment of early adopters. Or maybe something much better comes along. Alternatively, it could mean that your product is great, but is only really suitable for a small to medium sized market that you have already saturated. In any case, your growth engine will hit a ceiling.
What can you do to keep your userbase growing? It certainly depends on your company, but a good place to start is to be perfectly honest with yourself as to whether you are at risk for falling into one or more of the seven categories above.